March 15, 2016, 6:59 AM IST
Beyond creating a modern welfare state, Aadhaar can also be leveraged to democratise credit
In July 1969 the Lok Sabha was told that nationalisation of 14 banks “was needed to ensure that the needs of the productive sectors of the economy and in particular those of farmers, small-scale industrialists and self-employed professional groups are met in increasing measure“. This is not how things have worked out; India’s credit bloodstream has been poisoned by what the economic survey called the “twin balance sheet problem“ created by a small number of large borrowers and large lenders.
The traditional banking system has struggled to make credit democratic and wounded balance sheets have become a major impediment to private investment, and thereby to a full-fledged economic recovery . But India has a unique opportunity to create a new and alternative credit infrastructure that can provide easy access to credit for millions of businesses and individuals, arising from the convergence of Aadhaar’s recent legislative legitimacy with regulatory innovation, technology and digitisation.
Lok Sabha’s passing of the Aadhaar Bill lays the foundation for an efficient, effective and modern welfare state. The reform of India’s subsidy regime will now be taken beyond LPG to include kerosene, fertiliser, food, water, electricity, interest subvention, cash support to farmers instead of the distortionary minimum support prices and much else.
Aadhaar will not only deliver minimum consumption levels to those who need it but make resources available from the subsidy saved from misdirection and fraud. However, there is another equally large and immediate opportunity that has now presented itself thanks to the future of Aadhaar being unequivocally settled; the use of the Aadhaar platform to revive credit and kickstart the Indian economy .
India currently faces a prolonged nuclear winter of lending. The institutional infrastructure for resolving this situation is inadequate or non-existent. Under the combined gaze of the Supreme Court, CBI and TV anchors, PSU bank leadership is like deer caught in a headlight. No one will resolve a loan, because it will involve the bank taking a haircut. Since we are incapable of judging whether the decision to settle was a business decision or malfeasance, the best strategy for a manager will be to do nothing.
I am afraid this will take many years to get resolved. It is also becoming clear that this hesitancy has infected forums like Corporate Debt Restructuring (CDR), Strategic Debt Restructuring (SDR), Joint Lenders Forum (JLF) and declaring willful defaulters. The new bankruptcy code is important and overdue but will not, in and of itself, resolve the nonperforming asset problem of the banking sector. Combined with weak sentiment in the capital markets, a shallow domestic bond market, and the currency risk of international borrowing, many Indian businesses will be starved of capital for growth. This mess cannot be fixed by tweaking fiscal and monetary policy .
Could there be a plan B? As mentioned, India has the unique opportunity due to a policy and technology window to build a completely new and alternative credit architecture to provide access to credit to millions of businesses and individuals.The JAM trinity (Jan Dhan, Aadhaar and Mobile) enables the creation of an India stack (digital interfaces for all aspects of finance like documentation, payments, consent for information, etc) for India’s 21 new bank licensees (this is more than new bank licenses issued in the last 50 years).
Combine these with more new “on tap“ banking licences, well capitalised NBFCs and healthy incumbents, and we have a multitude of institutions that can address the supply side of credit. Fresh capital for lending will come to all these institutions. In addition, the MUDRA refinance channel can be digitally plugged into this system.
On the demand side, there are millions of businesses and consumers starved for credit. With JAM becoming ubiquitous, the distribution channel is in place for borrowers to access credit and transact on their smartphones. The India stack will enable paperless, presence-less and cashless transactions. Most importantly with so many digital data sources coming online payment activity , social media, taxes, bill payments, etc the electronic consent architecture of the India Stack would enable borrowers to harness their own data to demonstrate their track record to get a loan.
This combined with the latest machine learning algorithms will be able to make high quality lending decisions which are fully auditable. This could scale quickly; the last decade has shown us that network effects of rapid growth kick in once you combine a streamlined digital platform with aligned incentives; smartphones, Aadhaar, WhatsApp or YouTube all reached a billion users in a few years.
The principle behind bank nationalisation was democratisation of credit.And as Gandhiji said in 1939, “a principle is a principle and in no case can it be watered down because of our incapacity to live it in practice. We have to strive to achieve it, and the striving should be conscious, deliberate and hard“.
An immediate consequence of the new Aadhaar Bill is the ability to create a digital lending architecture that would act as a strategic alternative to the traditional banking system, de-risk the country from a potential prolonged stasis, and democratise credit. With a lash of ambition and a little bit of work, Indian finance will never be the same again.
DISCLAIMER : Views expressed above are the author's own.
